Insurance Agencies
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Industry Overview
About 150,000 insurance agency and broker offices in the US generate annual revenues of $93 billion. Large companies include Aon, Marsh & McLennan, Arthur J Gallagher, and the North American operations of Willis Group. Despite the prominence of large companies in the commercial segment, the industry remains highly fragmented: the largest 50 firms only hold 20 percent of the total market. Many companies that primarily offer insurance products to businesses function mainly as brokers. Captive agencies operate as a sales agent for a single insurer, working on its behalf; independent brokers sell products from several providers.
See the Insurance Carriers profile for coverage of insurance providers and the Managed Healthcare profile for coverage of group health insurance providers.
Competitive Landscape
Demand is related to consumer income and commercial business activity. When the economy grows, so does the demand for personal and business insurance. When the economy contracts, as it did in the late 2000s, demand for insurance falls.
The profitability of individual agencies depends on effective marketing, client referrals, and customer service. Large agencies have advantages in name recognition, connections with more insurers, and the ability to craft more complex insurance packages. Although small agencies formerly competed by specializing in a specific product line, they are increasingly diversifying to build business. Average annual revenue per employee is around $200,000.
Products, Operations & Technology
Major insurance products, excluding group health insurance, sold by agents and brokers are primarily of two types - property and casualty (P/C), and life. About 60 percent of insurance premiums come from the property/casualty side; 40 percent from life insurance.
Property and casualty agencies sell policies to consumers that cover homes, cars, and other personal property. Agents sell commercial lines to businesses that are designed to cover company assets and industrial properties. Standard personal lines include auto, home, and property coverage; for businesses standard lines may cover property, medical malpractice, workers compensation, and product liability. Specialty business lines may cover specific industries such as aviation and marine, or special products such as kidnap and ransom, computer theft, or directors and officers. Agencies may specialize in serving certain groups with specific needs such as wealthy clients, farmers, or car club members. However, during the late 2000s recession agents began branching out into other insurance lines to capture new business.
Life insurance agencies sell single or joint policies, whole life, term life, or variable life policies, among other products. Term policies are the most straightforward life insurance product because a premium is paid solely in exchange for the possibility that the insurance holder will die during the term of the policy; any investment income is kept by the insurance company. Most other life insurance policies include some type of investment feature and therefore have higher premiums. Annuities (fixed, variable, deferred, and payout) are almost entirely an investment product, with a large upfront premium and investment-type returns every year.
More insurance agents are selling financial planning services to their clients since the adoption of the Gramm-Leach-Bliley Act in 1999, which allowed the insurance industry to sell financial products. Agents can become licensed to sell mutual funds, variable annuities and other securities, and many captive agents were encouraged to branch out into this area by the carriers they represented. As insurance and financial products have become more complex, agents have become an important source of information regarding these products.
Individual supplemental health policies have become more popular in recent years as managed care providers, who primarily sell health insurance to groups, have limited their coverage. Three major types are generally offered by agents. Disability insurance covers short- or long-term disability with monthly payments. Long-term care insurance covers nursing home, hospice, and other care. Supplemental health policies cover the policyholder for medical services not covered by standard group insurance plans or programs like Medicare.
Agency agreements with insurance companies allow agents to bind insurance coverage on the company's behalf and specify the commission the agency receives from policies. Agencies usually have agreements with multiple insurance companies, although some work exclusively with one company and are essentially franchisees. Typically, agencies receive a large percentage of the initial premium from a new policy and a smaller percentage from renewal premiums, but the compensation formula varies according to the policy premium schedule. Brokers work on behalf of their clients, primarily businesses, soliciting bids from several insurers; brokers operate extensively in the commercial segment of the industry.
Technology is integral to running an insurance agency. Agency management systems allow agencies to track customers, policies, receivables, and other business operations. Web sites allow customers to research and buy insurance online. Other IT needs include Internet connectivity, fax machines, and scanning and imaging software. Agencies spend anywhere from 2 to 3 percent of revenues on information technology systems.
